The Economic Effects of European Tax Jurisprudence

The aim of this paper is to establish whether jurisprudence of the European Court of Justice (ECJ) on corporate tax leads to a more level playing field and increased tax neutrality within the European Internal Market. It uses the ruling on Lankhorst-Hohorst regarding the compatibility of thin capitalisation with free movement provisions as a case study to demonstrate how the jurisprudence of the Court does not necessarily lead to increased neutrality or a more level playing field. An economic analysis demonstrates that, depending on the reaction of Member States to the ruling, differences in capital costs faced by firms operating in the European Internal Market may increase, whilst GDP and welfare may decrease. Consideration of actual legislative amendments introduced to thin capitalisation rules by Member States following Lankhorst-Hohorst seems to indicate that it is this negative scenario which has prevailed. The paper considers the European constitutional implications of this conclusion.